Countrywide leads about face on buyout talk

GregMorcroft

NEW YORK (MarketWatch) - Shares of financial stocks staged a dramatic rebound Thursday after a news report said Bank of America Corp. is close to an agreement to buy troubled mortgage lender Countrywide Financial Corp.

Countrywide
CFC, +5.33%
shares rose more than 60% at one point following the report in the Wall Street Journal.

That news, as well as an indication from Chairman Ben Bernanke that the Federal Reserve is ready to cut rates further, turned the sector around.

Bernanke said Thursday that more interest rate cuts are on the way, as the U.S. central bank wrestles with a deteriorating economy brought on by a struggling housing market, high-energy prices, and a weaker stock market.

In an unusually blunt speech, Bernanke said the economic outlook has taken a turn for the worse in the early days of the new year and that the Fed stands ready to act aggressively to ward off further weakening. See full story.

The Financial Select Sector SPDR Fund, an ETF that tracks the financial stocks in the S&P 500, had traded as low as $26.43 Thursday, before rallying to trade recently at $28.02, up 3.6%.

It isn't clear how quickly a deal might be struck, but two people familiar with the matter said it could occur very soon, the newspaper said. It's also possible that an agreement could be delayed or fall apart altogether, it added.

The New York Stock Exchange asked Countrywide to comment publicly on Thursday, but the company declined.

Countrywide shares have taken a beating this week as investors again expressed little confidence the company could survive the ongoing credit crunch.

The financial sector had been broadly lower earlier in the session after a pair of profit warnings, from Ohio-based regional bank Huntington Bancshares and credit card firm Capital One Financial Corp. sent their shares lower Thursday and spread anxiety across the financial sector for another day.

Huntington Bancshares Inc.
HBA
said Thursday it expects a fourth-quarter loss of $239 million, or 65 cents a share. The Columbus, Ohio, holding company attributed the expected loss to charges and provisions totaling $1.00 a share in the latest period.

The largest of the charges is $275 million, or 75 cents a share, related the company's decision to restructure its lending relationship with subprime mortgage lender Franklin Credit Management Corp., cutting Franklin's debt by about $300 million.

Huntington shares fell 7%.

Capital One cut its 2007 earnings-per-share view to $3.97, below its previous forecast of $5, and said it expects fourth-quarter earnings of 60 cents a share.

The McLean, Va.-based financial holding company said the reduction was driven by increased provision expense and additional legal reserves established in the fourth quarter.

Capital One
COF, -2.18%
expects earnings from continuing operations, which exclude the loss from discontinued operations from the closure of GreenPoint Mortgage, of about 85 cents a share for the fourth quarter and $6.55 a share for 2007.

The Wall Street giants are both negotiating further capital injections from overseas investors as they continue to be hurt by the credit crisis, according to a published report Thursday.

Both firms are rushing to finalize the deals before they report earnings later in the month, which will likely include further losses stemming from their exposure to mortgage-related investments.

Citi is also expected to consider slashing its dividend in half in a move that would save it around $2.5 billion a year, the newspaper reported. See full story.

Shares of Blackstone Group
BX, -1.77%
added a bit more than 1%. The firm said it's buying leveraged-finance specialist GSO Capital Partners for as much as $930 million as the private-equity giant looks to capitalize on opportunities created by distressed debt markets. See full story.

Blackstone also said GSO Capital's expertise would help its ability to finance deals it puts together. See related column.

"Given the current dislocation in the credit markets, this is an ideal time to create a more powerful, diversified platform from which to grow Blackstone's business," said Stephen Schwartzman, Blackstone's chief executive, in a press release.

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